Bloomberg News

SAC’s Cohen Has No Recollection of Dell E-Mail Cited by SEC (3)

By Katherine Burton
July 23, 2013

SAC Capital Advisors LP defended its compliance team, saying it deploys some of the most aggressive communications and trading surveillance in the hedge-fund industry. Photographer: Rick Maiman/Bloomberg

Steve Cohen doesn’t recall reading
an e-mail on Dell Inc. (DELL:US) that was cited by the Securities and
Exchange Commission as evidence that that the founder of SAC
Capital Advisors LP failed to supervise his employees, according
to a report given to the firm’s employees yesterday.

While Cohen sold his stake in Dell after being forwarded
the e-mail, evidence suggests he did so because one of his
portfolio managers started selling the stock, SAC said in a 45-page paper that rebuts many of the facts outlined in the SEC’s
administrative order filed last week against the 57-year-old
billionaire. There’s no evidence Cohen ever read the
communication, according to the paper.

The response, posted on SAC’s internal website, illustrates
Cohen’s efforts to keep his employees calm while fighting the
SEC’s allegations -- the government’s first against him
personally -- and its efforts to close down his $15 billion
hedge fund. Cohen was accused of ignoring red flags in trades
conducted by two portfolio managers, Mathew Martoma and Michael
Steinberg, who have both been charged with securities fraud.

“Any claim that Cohen overlooked red flags showing
unlawful conduct by SAC employees is contrary to his and SAC’s
longstanding demonstrated commitment to the firm’s compliance
efforts,” Cohen’s lawyers wrote in the paper, which was
reported yesterday by the Wall Street Journal.

Dell Trade

In the SEC’s July 19 order, the agency presented new
details that it said showed Cohen received “highly suspicious”
information that should have caused any reasonable hedge-fund
manager to investigate the basis for the alleged wrongdoing.

The SEC today scheduled an administrative hearing in the
case for Aug. 26 at 9:30 a.m. in Washington. Chief
administrative law judge Brenda P. Murray will preside over the
hearing.

Martoma, 39, was arrested in November for alleged insider
trading in Elan Corp. and Wyeth after receiving confidential
information from Dr. Sidney Gilman in July 2008 that caused him
and Cohen to abruptly abandon their bullish bets and sell their
holdings. The trades earned SAC profits and avoided losses of
more than $275 million, the government said. Steinberg was
arrested in March for trading in Dell and Nvidia Corp. (NVDA:US) based on
illicit tips given to him by his analyst. Martoma and Steinberg,
41, have pleaded not guilty.

‘Highly Suspicious’

The SEC said in last week’s order that Cohen received a tip
about Dell Inc. that was also sent to Steinberg, and that he
traded afterward. Cohen sold off more than $11 million in Dell
stock within minutes of getting a copy of a “highly
suspicious” e-mail from Jon Horvath, Steinberg’s analyst, on
Aug. 26, 2008, two days before Dell was scheduled to release
earnings.

SAC countered in its report that Cohen sold his shares
because one of his portfolio managers, who had who initially
recommended that Cohen buy Dell, and whose trading Cohen relied
on frequently in establishing his own positions, was selling
some of his shares. That portfolio manager is Gabriel Plotkin,
according to people familiar with the matter.

The report stated that at that time, Cohen only opened
about 11 percent of his messages. SAC argues that even if Cohen
had read the e-mail, which mentions a “second-hand read” from
someone inside the company and warned that Dell’s gross margins
would be less than the market expected, there is no evidence
that it contained material nonpublic information.

‘Red Flags’

After Dell reported earnings that month, Cohen e-mailed
Steinberg “nice job on Dell,” according to the SEC.

The SAC report also says there were no “red flags”
suggesting that Martoma had improper information and that his
recommendation to reduce the firm’s exposure on Elan --
delivered in a 20 minute phone call -- made sense given that
the shares had appreciated approximately 40% over the previous
six weeks.

SAC defended its compliance team, saying it deploys some of
the most aggressive communications and trading surveillance in
the hedge-fund industry. The firm said it has daily reviews of
e-mails, instant messages and internal write-ups, SAC trading
using keyword- and concept-based search protocols; weekly
reviews of randomly selected portfolio manager teams; reviews of
electronic communications between investment professionals and
their former employers for a period after commencing work at
SAC; reviews of trading made around market moving events and
corporate access events; and regular reviews of the firm’s most-profitable trades.

In a 2011 deposition taken in connection with a lawsuit
against SAC filed by Fairfax Financial Holdings Ltd. (FFH), Cohen
said, “I’ve read the compliance manual, but I don’t remember
exactly what it says.” Cohen also said during the deposition
that no employee had ever been punished for violating the firm’s
compliance policy.

To contact the reporter on this story:
Katherine Burton in New York at
kburton@bloomberg.net

To contact the editor responsible for this story:
Christian Baumgaertel at
cbaumgaertel@bloomberg.net